Vacation season is upon us. We received a question last week regarding saving for a vacation, and it is one worth discussing. Can you use your Roth IRA for vacation expenses?
The Roth option can be very confusing. The Roth concept, named after Senator Richard Roth, allows you to pay taxes on your retirement savings today and not have to pay taxes upon withdraw — meaning your growth is tax-free going forward.
There are three ways that you can use the Roth strategy: a Roth contribution into an IRA (Individual Retirement Account); a Roth conversion from tax-deferred dollars in an IRA or retirement plan where you pay the taxes now and receive tax free growth on future earnings; and a contribution into a retirement plan that allows for Roth contributions.
A Roth IRA should not be used as a “put-and-take” account. That is where you put money in this year knowing that you are going to pull it out later this year. That being said, a Roth IRA contribution (not from an IRA conversion or a plan contribution) can be accessed at any time without penalty. That is not true of the growth in the account, however, except for certain allowable expenses.
This means that you can indeed withdraw money from your Roth IRA account up to the amount you contributed to go on vacation.
I love this quotation and question from Andy Stanley: "Based on your past experiences, your current circumstances and your future hopes and desires, what would be wise for you to do at this time?" Family finances fail when we let short-term wants outweigh long-term needs. This why planning and understanding the tax codes is critical.
Because you have access to the money at all times from an IRA contribution, you can use it for an emergency fund, especially when you are younger. We find families that have a five-figure ($10,000 and up) emergency fund that they haven't touched in years. There is no reason, if they have earned income and qualify to contribute to a Roth, that those dollars should not be contributed into a Roth IRA.
Keep in mind that the Roth is merely a tax code. The investments in a Roth IRA, if it is your emergency fund need, to be invested very conservatively like a certificate of deposit at a bank. If the money is for retirement, then you can change the allocation to use stocks and bonds.
Don't get confused thinking IRAs are locked up until you reach age 59½. That is only true for the traditional IRA.
There are two tax codes in the United States and most people think that is one for the rich and one for the poor. In reality, it is one for the informed and one for the uninformed. If you have questions about your financial journey, please contact one of our advisors at the Financial Enhancement Group, LLC.
Joseph “Big Joe” Clark, whose column is published Sundays, is a certified financial planner. He can be reached at firstname.lastname@example.org or 765-640-1524.